Spring Cleaning

Spring has arrived. It’s time to clear out closets and cupboards, store winter things, give away or toss out items no longer needed and generally make the house sparkle.

What’s good for the home is good for the portfolio. Spring is a great time to revisit investments, discard what’s no longer needed or wanted and refresh one’s portfolio with the best investment ideas for the months ahead.

A lot has happened in the last few months, underscored by significant moves in stocks, bonds, currencies and commodities. Those factors must now be considered when deploying or redeploying capital.

What’s changed?

The most significant market shift since the beginning of the year has been a dramatic and unanticipated rise in global bond yields. From their early January levels of 3.86%, US 10-year Treasury yields have climbed some 80 basis points to their current rate near 4.70%.

Rising Treasury yields have caused equity markets to wobble, with the S&P 500 Index down 3% from its late-March peak.1 Rising US yields have also propelled the US dollar higher in the world’s foreign exchange markets. Year-to-date, the dollar is up 12% versus the Japanese yen and 4% in trade-weighted terms.2 Meanwhile, crude oil prices have advanced 16% in the first four months of the year.3

Several factors have accounted for these dramatic market shifts. But what we see as most important is the combination of resilient US growth (defying expectations of a recession) and sticky US inflation (which was supposed to keep falling but has not). As a result, the Federal Reserve (Fed) has indicated that any rate cuts will come later and more gradually than had been anticipated earlier this year. The re-pricing of Fed easing has been the most important driver of rising yields, which in turn has supported the US dollar and eroded demand for equities.

Surging oil prices also reflect better-than-expected US (and global) growth as well as heightened uncertainty about Mideast crude oil supplies. Attacks on shipping headed for the Suez Canal have forced many deliveries to take the longer route around southern Africa, adding to crude oil’s cost and supply concerns.